Apple will offer smaller, cheaper iPhone, agrees analyst

Apple is working on a line of smaller, less-expensive iPhones, a move one analyst said the company "would be stupid not to" pursue.

Several media outlets, including the Bloomberg news service and the Wall Street Journal , have cited unnamed sources in recent days who claim that Apple may launch a smaller iPhone -- dubbed "iPhone Nano" by some in a tip to Apple's Lilliputian iPod Nano music player -- later this year.

The new models could be offered to carriers at half the price of the current iPhone -- carriers now pay an average of $625 for each iPhone -- making it feasible for them to fully subsidize the smartphone when customers commit to a long-term contract. Alternately, Apple could price the iPhone Nano as low as $200 without a service contract.

According to the Wall Street Journal, the smaller phones would offer little or no storage space for mobile apps. Instead, the devices would rely on cloud-based services to store their music and photo collections, stream movies and television programs, and run online-based apps.

Apple made a similar shift last year with Apple TV when it replaced the $229 original model's internal hard drive with only enough memory to stream content, then dropped the device's price to $99.

The cloud-based services for a new iPhone would be based on Apple's MobileMe, some or all of which would be offered free-of-charge, said the Wall Street Journal, and presumably run from servers at the company's $1 billion North Carolina data center.

One analyst said such a strategy not only is common among phone makers, but would let Apple better compete with lower-priced smartphones running Google's Android operating system.

"This is a typical strategy, where you start at the high end, then move down to the needs of the lower-end customers," said Jack Gold, an analyst at J. Gold Associates. "It would be a pre-emptive strategy on Apple's part to counter Android, which is clearly gaining market share."

Estimates by Gartner Research put Android as the world's second-best-selling smartphone OS , with a 23% of the market in 2010, up from just 4% the year before. Apple's iOS, meanwhile, accounted for 16% of the smartphone market last year.

Android-based smartphones sell at multiple price points in the U.S., but some are fully subsidized by the carriers or sport a price tag half that of the $199 entry-level iPhone when customers agree to a new service contract. For example, Verizon sells HTC's Droid Incredible for $100 online to buyers willing to take on a new two-year plan.

"Apple would be stupid not to do this," said Gold. He also pointed out that the move would be consistent with Apple's past practices. "It would follow what they did with the iPod," he said, referring to the music player that launched in 2001 at $399, but was followed by the less-expensive $249 iPod Mini three years later.

By stripping out memory, Apple could reduce the cost of building an new iPhone model, then shift the storage to the cloud. According to recent estimates by IHS iSuppli, the memory in the latest iPhone 4 accounts for about a quarter of the smartphone's bill of materials (BOM), or component cost to Apple.

"In a sense, that's what people want," said Gold of the lower price point and focus on online services and storage. "As you move downscale, people want, first of all, a reliable phone. But they also want a lot more texting and a lot fewer apps, so if they can use online services, it's much more attractive to them."

Analysts have put forward several theories about how Apple will use its new North Carolina data center , ranging from a subscription music service to processing of pay-by-iPhone retail transactions.

The Wall Street Journal said its sources pointed to a massive change in MobileMe, which would act as a "locker" for the photos, music and apps that iPhone 4 owners now store in the smartphone's internal memory. Apple currently charges consumers $99 annually for MobileMe, and has been criticized for billing users for services that they can obtain elsewhere for free.

Both the Wall Street Journal and Bloomberg said Apple could roll out the new line of iPhones as early as this summer, but warned that plans could change.

"I would hope this year," said Gold. "Apple usually has a whole bunch of product announcements in the spring time frame, but what it will [announce] is, of course, a mystery to everyone."

This isn't the first time that rumors of a less expensive iPhone have surfaced. Shortly after the mid-2007 launch of Apple's first generation smartphone, one analyst claimed that the company would shortly introduce a cheaper model based on the iPod Nano.

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